• If Labor returns to power we may see a spike in share buy-backs, should you participate? read here

Which industries are the most valuable today?

08032018

Which industries are the most valuable today?

Readers will know that we buy the publicly traded stocks of individual global businesses when we identify: (i) a high degree of business quality; and (ii) substantial evidence that the business is being underpriced by the market.

Now, what tends to happen is that market-mispricings (both overpricings and underpricings) tend to cluster within industries. So it is interesting to analyse in which industries we are finding value at the moment, relative to, say, one year ago.

Shown on the chart below are the aggregated industry exposures for the Montgomery Global Fund as of March 2018; as compared to March 2017.

Screen Shot 2018-03-08 at 10.35.51 am

A number of observations jump out. First, we don’t invest in every industry “for the sake of it”.  Some investors – especially passive investors – do on the grounds of diversification. We believe in what we call “selective diversification”. By selective diversification, we mean that we like being diversified, but not to the point where it means we would be forced to own low-quality or overvalued businesses.

Second, you can observe from the above chart that the Fund’s industry exposures have evolved over the last 12 months (LTM). Perhaps an easier way to visualise the difference between the red and the blue bars above is provided by the chart of “differences” below.

Screen Shot 2018-03-08 at 10.36.21 am

The big observation that jumps out here is the Fund’s increase in Financials exposure combined with a reduction in Information Technology (IT) and Healthcare. So what is going on here?

First on financials, this is primarily a function of the global environment in which we find ourselves. Global growth is accelerating at a time when the largest economy in the world has recently unleased a significant new dose of fresh fiscal stimulus. These conditions are ripe of interest rate increases which are not being priced in by the high-quality financials businesses owned by the Fund.

Second, with respect to the reduction in IT and Healthcare, we love many of the structural tailwinds that persist in these industries. But not at any price. We have trimmed and exited many of the businesses we have owned in these industries on valuation grounds, primarily. Should the stock prices of these business fall, we would naturally look to add them back to the Fund’s portfolio when the time is right.

To find out more about the track record and performance of the Montgomery Global Fund, please visit: http://montinvest.com/mgf

INVEST WITH MONTGOMERY

Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP


3 Comments

  1. Andrew

    I wonder how much of the relative rankings in different industries reflects the background of the team? For example my background is in the mining sector. It is an area I understand and am comfortable investing in because I can read past the glossy presentations and hyperbole. I’m a lot less comfortable with other sectors and my share weightings reflect that. By definition the investment team at Montgomery will be comfortable with financials as they live it each day. I know that you’ll say that you are all professionals and look at businesses with a cold actuarial gaze but you are also human and thus lean to what you know.

    I guess you could extend that to say that some of the financials have done well because the large funds support them, the funds are run by people comfortable with that sector and so the cycle feeds on itself. That is not a criticism but if you accept it as a valid observation then it implies opportunities in other sectors for people with familiarity in that sector. It also implies that those of us not in the financial sector should have a lower weighting of financials than your fund does, as being comfortable with a sector does not equate to always being right.

    Cheers
    Kim

  2. Lyall Taylor
    :

    The Australian financials (notably the banks) will be hurt not hindered by a rising global interest rate environment. Australia is a current account deficit country that relies on external financing to plug, and a lot of this is intermediated by the banks borrowing in wholesale markets. Consequently, if global rates rise, Australian funding costs will rise.

    In order to maintain margins, they will need to raise interest rates to their borrowers, but this is likely to have a negative impact on mortgage affordability, potentially impacting house prices (raising risks of a credit cycle); reducing credit growth; and also slowing the domestic economy.

    If you’re buying Ausy banks because you think they will benefit from rising global rates, I would argue that logic is questionable.

Post your comments